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August 1, 2015 – Weekend Market Comment

August 1, 2015 – Welcome to my weekend market comment, an analysis tool I use in my own portfolio decisions, published free to the web every weekend before the New York opening bell. For full details read my disclaimer (link at the bottom of this page).

The Blah Blah Blah (courtesy of CNBC)
U.S. stocks closed mildly lower on Friday, the final day of trade for July, as investors digested energy earnings misses and soft data that could push an initial rate hike further out. Stocks were mixed to slightly lower in afternoon trade after earlier attempting to rally. The Nasdaq struggled to hold higher in afternoon trade as shares of major tech firms declined. The S&P 500 and Dow Jones industrial average traded lower as declines in energy stocks weighed.

The Dow Jones Industrial Average closed down 56.12 points, or 0.32 percent, at 17,689.86, with Coca-Cola leading advancers and Chevron the greatest laggard. Visa was the best performer for the month, rising 12 percent, while United Technologies was the worst with a near-10 percent decline. Nearly half the blue chips posted losses for July. The S&P 500 closed down 4.79 points, or 0.23 percent, at 2,103.84, with utilities leading five sectors higher and energy the greatest decliner. The two sectors were the best and worst performers for the month, respectively. The Nasdaq closed down 0.50 points, or 0.01 percent, at 5,128.28.

What I Think
I said a lot of it last week . . . despite a recent run up the market still looks toppy and range bound. Notice the above graphic of Captain America, the U.S. dollar is the last safe investment. The Dollar is way too strong for America's major firms to make outsized profits. Only a few stocks like Apple and Amazon holding up the market. China is a very dangerous basket case, for now, expect the U.S. market to move in lock step with Shanghai.

Add to that we are entering what has been historically two of the toughest months for the market, August and September.

It All Shows Up In The Charts . . .

Section 1: The Big Picture
These charts tell us if we should even be in the market at all.

Bull Bear Lines
Well of course the big picture is now and has been for several years now, you can't be wrong if you are long. But clearly the light green short term average is in a nose dive. The dark green 50 day ema is also rolling over. So yes green is over red, but it might not be true for much longer.

Industrial Production
America is nothing without manufacturing might. This recent dip is not a good thing. Looks a little better this week, at least it is not falling.

Non-farm Payroll Employment Index
As a consumer economy America is dependent on strong employment. This chart alone is the brightest spot on this weeks charts! it is the only reson I am not stuffing U.S. dollars under the mattress.

NYSE New Highs - New Lows
This is a deceptively simple indicator we simple count the number of stocks making New 52-week Highs on the NYSE and subtracting the number of stocks making New 52-week Lows. What is important is the shape of the line - up is healthy, down is sick. Think of this as the vital sign measurement for the health of the market.

Don't ignore this chart. My big concern is the yellow average line has begun to point down in a big arc, something we have not seen for a while. I am not putting any new cash in long equities until at least the green is above the yellow.

Market Renko
Renko charts are not based on time (note the funny date scale) and only draw a new brick if the market moves in to a new territory. They really can simplify the whole question of direction. As you can see we have been in an overall uptrend since the 08 crash.

Two weeks ago an uptrend bloc appears, this week a second down block!

Section 2: Short Term Timing
Consider this as fine tuning. As you learned in section one of the CME4PF School most investors don't need to plan the short term, But you can use this section to decide on ratios of risk. For example you can time a strategy of moving from a defensive ETF like DEF and an aggressive ETF like QQQ. or between a ratio of equities and bonds. You could move from broad safe indexes like DIA (the dow 30) and  aggressive equities like Google and Amazon. Remember don't use these  charts to anticipate, and don't do counter trend strategies like shorting a bull market.

Primary Sell
Heading up? Not exactly enthusiastically.

On Balance Volume
Well the OBV line is breaking lower than the market, not a good sign, no panic yet, but this is not good if it keeps going.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended in the low 12s but dipped into the high 11 during the day Friday.

From late March through mid-June, equity markets were fast asleep, and volatility was non-existent.  The VIX volatility index (also known as the “Fear Gauge”) had dipped down into the 12s, and it was a snooze-fest on trading floors.  At the end of June, though, Greek debt problems popped up in the headlines again, and then China’s stock market decided to collapse.  For a couple of weeks there, the bears came out of hiding, and volatility spiked.  As shown in the chart below, the VIX index rallied up to 20 in a very short period of time. But in even less time than it took to get up to 20, the VIX has moved back down, and as of this week again near the bottom of its range.

Consider buying protection while it is cheep.

VIX Evaluator
Don't forget this is an experimental VIX indicator. Interesting, it not only predicted the China/Greece mess, then it has calmed down.

S & P 500 Over 50 day
As you can see this market is stuck in a range. No one is willing to play the "edges" and so the market stalls. Recently I asked "Will we stall out at the 62 as before?" It did, now for an encore?

Green Arrow
Wait for a green Arrow before putting new money to work. Recent signals have been of little value until we break out. This confirms what I said about the NYSE High Low - wait to put new investments to work.

Section 3 Allocations and Sectors
OK Now you know  the market direction, where should you put your money?

Nasdaq Summation
This chart tells us if technology is a good bet now, general the NASDAQ leads the other indexes. The summation index can often spot weakness-strength before the price reflects it.

Nasdaq makes new high but early only a lucky few stocks carried it there. Wow look at this summation index -- risk off, head for safety!

Aggressive Defensive Chart
Midcap 400 cap leads market a good sign, except it is really a flight from the strong dollar .

Bond vs Equities
The consumer is the last hope with Amazon having a great quarter and bonds are doing well as fear creeps in.

Bond Direction
The direction of the bond market at this time is critical. The Bond Bull began in 1981, we have has a 33 year bull market in U.S. Bonds. When it unwinds it will have major implications.  This fall, as the US federal reserves tries to take off the economic training wheels, interest rates are near zero and so have no place to go but up, then again many feel the economy cant take the shock. The 50 day average line (red) is clearly in a downtrend. The US treasury market is is twice the size of the stock markets. As investors flee bonds who will buy them from fleeing investors? Read here.

This week more embracing bonds not fleeing, clearly fear of a market sell off is outpacing fear of a rate hike.

This chart shows that everyone wants a bit of tech (Google effect), but perhaps that was over done. Recently I said "Bet you that brown DEF line starts upward this week." It did -- a sign for caution.
    XLF - Financial Stocks - Dark Blue dots
    QQQ - Nasdaq - Purple
    XLY - Consumer discretionary - Green
    XLU - Utilities - Red
    DEF - Defensive stocks - Brown

It is a global Market are there better place to put your money? Remember this chart is compared to the S&P 500 U.S. market. If it is falling these all might be along for the ride, even if this chart shows them rising. Interesting to see some Philippians action.  Canada you still suck!
    XIU.TO - Canada - Blue dots
    DAX - Germany- Purple
    FXI - China - Green
    EEM - Emerging- Red
    EPHE - Philippians - Brown

Major Market Sectors
This is our newest chart, it shows the over all U.S. Market, from the equal weighted S & P 500. Below it are broad sectors you might want to look at. Well this says, Canada sucks (who knew) and some relief China might be back (hrumph) in other words this week you learned nothing form this chart.

    Canada Dividend Stocks vs S&P 500 in Canadian $ - Red
    Emerging Markets vs  EW S&P 500 - Pink
    US Bonds vs EW S&P500 - Blue
    Commodities vs EW S&P500 - Brown
    Gold vs EW S&P500 - Gold

Section 4: Special Interest

Canadian Dollars
A reader from Alberta Canada asks... Can the Canadian dollar go lower?

Well readers here know that back in  2012 I told you all to sell your "Northern Peso" as I did, converting to U.S. dollars. The basis of that was my April 2012 prediction of the end of the commodity cycle in Pop Goes the Commodity Bubble.  But looks like a few did not listen.

In early 1995, The Wall Street Journal described Canada as an "honorary member of the Third World" and dubbed the Canadian dollar as the northern peso. However at that time Canada was a diverse economy, in 1995 the Toronto stock exchange was over 30% manufacturing and technology. Now in 2015 technology is less than 1% of the Canadian public markets. Today Canada really is just another banana republic (unfortunately not the clothing store kind).  Canadians are quick to  point out that Canada is America's biggest trading partner. But in the 80's and 90's we sold the USA minivans and phone systems. Now all the great white north mostly trades low value add commodities. Canada is an exporter of unwanted rocks like nickle, unwanted coal and oil valued under the cost of production. Look at this 5 year chart and you begin to understand that the Canadian dollar is just a proxy for the commodity market. The red is the Canadian dollar, Black is oil and Cyan is commodities in general.

The Value of the Canadian dollar is directly tired to commodity prices and the last commodity left standing WAS Oil now that is gone. As the U.S. dollar gets stronger, global growth is falling and global export growth is falling, and that means generally that commodity prices should fall as well. July 2015 was the worst month for Oil in 2015, now about $48.

 "Canada you are toast, Bwahaha! "

So can the price of oil go lower ... well of course it can. Let us look first at who the major oil producers are today: Saudi Arabia, Qatar, the United Arab Emirates and the United States, as well as Russia, Iran and the Islamic State. Of those, we can make a clear distinction between the first four countries who have solid economies and ample amounts of cash reserves and who can sustain a sharp drop in revenue when oil is sold at a lower price. They are also the same group of countries currently leading the fight against the so-called Islamic State. The big losers in this case will clearly be the last three on that list: Russia, Iran and the Islamic State. This bunch are currently engaged in highly controversial conflicts and are facing opposition from the United States and the West.  Also the Saudis as part of the bonus get to destroy the U.S. fracking boom before it goes too far.

This is nothing new -- In 1980 I was joining the job market just as the middle east opened up the spigots, the Canada in drilling rigs all went home to Texas and the price of oil went from $50 in to a steady free fall. Look at Saudi Arabia’s actions in 1998 and 1999…they displayed a boldness not seen before. As prices weakened during the Asian debt crisis, the Saudis declined to cut production. Instead, when Venezuela suggested it might produce at a maximum rate, the Kingdom indicated it would do the same. Prices plummeted under $20 a barrel and were only restored after Mexico, Oman, Norway and the other OPEC members joined Saudi Arabia in reducing output.

So to answer my reader . . . oh yes, in an oil price war the Canadian dollar can go a lot lower!

The Crash In China
A delusional government in China continues to order state companies to buy up shares, each time the market gain ground a wave of sell orders flooded the markets. This was smaller investors cashing out every-time they hit breakeven.
It Looks like this CNBC CLIP 

Stocks are down by 29% from their peak in June, and investors have continued to sell shares despite the strongest efforts ever by Beijing to prop up prices. The current bear market—defined as a fall of 20% or more from a peak—is the 27th that investors have suffered in the past 25 years. Amazingly this is only the 21st worst in terms of losses.  Shares have lost half their value three times, and plummeted by two-thirds once, in 1993-1994, when the Shanghai Composite Index fell by 67% from its peak to its low point.

The sell-off earlier this week was driven by the belief that the government might reduce that backing. After shares fell 8.5% Monday, the country’s securities regulator said it would step up buying and wasn’t exiting the market. Tuesday, it said it was launching an investigation into whether investors coordinated the dumping of shares.

However in the economist this week in an article that speculated on the YUAN becoming the a global currency the magazine mocked China's stock market controls as proof the government is too immature to be a global player yet. However that is just the kind of thing that may cause the communist party to withdraw support in the markets. We may not have seen the biggest crash yet.

No Cash Funds
Mutual Funds are out of Cash. This is the all time lowest holding of cash for mutual funds. One interesting theory on why the market remains stuck in this trading range may be the dearth of what the street calls "dry powder," or cash sitting outside the stock market that could be plowed into equities.

Keep in mind no cash means mutual funds have no cushion if there was a pull back, with unit holder redemptions --- these funds would have no choice but to sell their current equities, driving price down more. Oh wait that would end really badly . . .

Historically low cash levels in funds lead to market breakdowns.
  • In 1971, cash levels went as low as 4% and a -9% market decline followed.
  • In 1972, these cash levels went as low as 3.9% and a -42% market decline followed.
  • In September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.
  • In March 2007, we hit the prior low record of 3.7% that did not go well come 2008 with the biggest sell off in our lifetimes. 
Bull markets generally start when Mutual Funds are over 10% in Cash. 

President Trump
Donald Trump has put in a bid to be U.S. president. Many prior Presidents have changed the look of the White house adding columns, or the Kennedy Rose garden and the Jackie Kennedy room renos. Speculation is now on the internet about what would Trump do to put his mark on the White House:

It is summer and the markets are moving sideways. Don't fight it.  Keep in mind that September is often treacherous. We are six years in to a bull market and the bull is tired. Valuations are high, earnings are low. The five top trades like Google are over crowded and Mutual funds have run out of cash to push things higher.  Even if we get another year or two out of this bull market it will not be the heady times of 2013. That said, this is still a bull market, don't short the U.S. market with green over red on the Bull Bear lines. We have recently hit 52 week highs in many markets and there could be a strong lift off this fall.

Let the charts guide you. Beware a falling OBV line. Don't pour in new money and chase when the NYSE High Low graph looks this sad.

I will leave you with this quote:

"This is the first time in recorded history that all the major world’s central banks are printing staggering amounts of money.  Now the world has this huge artificial ocean of liquidity. The people getting the money are having a wonderful time. But when it ends, it will be very nasty. The idea that the solution to too much debt is more debt is mind-boggling. We have had economic slowdowns every four to seven years since the founding of the republic. We’re overdue for another problem. When this artificial sea of liquidity ends, we’re going to pay a terrible price."
- Jim Rogers

You can learn more about my indicators by visiting the CME4PIF school by clicking here.

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